A CPS official said: "I have decided that there is insufficient evidence to provide a realistic prospect of conviction against any individual for any offence in this matter."
"Before a prosecution can commence, there must be sufficient evidence for a realistic prospect of conviction... If there is not sufficient evidence, then a case cannot proceed, no matter how important or serious it may be."
Lord Michael Levy, Blair's Middle East envoy and chief fundraiser who was arrested twice during the 16-month probe, welcomed the announcement.
Levy said: "I have had every confidence that no charges would be brought against me. Nevertheless it comes as a great relief that after a complete and thorough investigation... I have been exonerated as expected."
John McTernan, Blair's former director of political operations, who had been interviewed as a suspect by the police, told the BBC he was "massively relieved, as I think most of my colleagues are".
Speaking in Paris shortly before the prosecution announcement, Brown said he hoped the decision would draw a line under the affair.
The prime minister said: "What I can say is that these were very serious allegations, it's right that the police investigated these matters and I hope... that we can bring an end to what has been now months of speculation."
As part of the inquiry, police had investigated possible breaches of the Honours (Prevention of Abuses) Act.
They also considered whether there was any breach of the Political Parties Elections and Referendums Act, which requires donations and non-commercial loans to parties to be publicly declared.
Blair, who became the first ever sitting prime minister to be questioned in a criminal inquiry, left office last month after 10 years.
Four people were arrested during the probe, including two of Blair's closest aides, Levy and Ruth Turner, a senior Downing Street official.
In all, police questioned at least 136 people either as witnesses or suspects.
The Labour party admitted being secretly loaned nearly $28.7m before the 2005 general election.
When the main opposition Conservative party also owned up to receiving an even larger amount at the same time, the probe was widened to include them as well.
Angus MacNeil, an MP for the Scottish National Party, whose complaints spurred police to launch their investigation in March 2006, said: "It is hard to believe that honest hard-working police officers have spent more than a year investigating this case for it to come to nothing.
"It simply beggars belief that the police and the CPS both believe no charges should be brought."